Upstart gets jump on Amazon in India's nascent e-shopping market

BANGALORE (Reuters) - On some days when they were starting out, the Bansals would get on a motorbike to make the rounds of book warehouses around Bangalore, ride back to their two-bedroom apartment and package up orders for online customers.

It was a humble beginning for Sachin Bansal and Binny Bansal, two ex-Amazon.com software developers who set out in 2007 to beat their old employer at its own game long before the world's top online retailer had even drawn up plans to enter the Indian market.

"We were doing everything ourselves for the first four to five months - from packing to shipping. Because our volumes were very low, our courier partners would sometimes refuse to pick up items from our apartment," Sachin Bansal recalls of the six months before they moved into their first office.

"So we used to get on a motorbike, hold the shipment in our hands and personally deliver them to our Bangalore clients."

In those rocky first days, Sachin told Reuters, the Bansals' suppliers -- seeing two youngsters who had quit stable employment with a reputable firm to go it alone -- would sit them down and counsel them to get a proper job.

The young Bansals have since been feted at home as poster boys for entrepreneurial India, establishing their company, Flipkart, as a leader in the fledgling Indian e-commerce market.

Flipkart is now India's biggest online bookseller, with over 10 million titles distributed from warehouses in five cities. It has branched from books into mobile phones, appliances, gaming consoles, music and movies, and now sells 10 products a minute.

It generated $11 million in sales last financial year, expects revenues to cross $100 million this year and is aiming at $1 billion by 2015.

That sharp growth trajectory has attracted $31 million in funding from U.S. venture capital firms Tiger Global Management as well as Accel Partners, which has a stake in Facebook.

Sachin Bansal declined to comment on a media report this week that Flipkart is lining up a $150 million fourth round of funding, but said earlier there are no current plans for an initial public offering.

Flipkart's business model and even its website resemble those of Amazon. But as a company it is dwarfed by the U.S.-based giant, whose revenues stood at $34.2 billion last year.

It is possible to order Amazon products from India, but the cost of postage is high and delivery is slow. Amazon still has no formal presence in India yet, though a source familiar with the matter said it is mulling plans to set up in the country next year.

"Amazon's idea is not new ... It's all about the execution," said Sachin Bansal, 30, now chief executive officer of the company he co-founded.

Sachin Bansal and Binny Bansal, Flipkart's 28-year-old chief operating officer, are not related. But they both grew up in the northern city of Chandigarh, they are both alumni of the prestigious Indian Institute of Technology (IIT) in New Delhi and they briefly worked together for Amazon in Bangalore, the southern IT hub where numerous global companies have back-office operations.

E-FUTURE?

There is little doubt that e-commerce will one day be big business in India, a country of 1.2 billion people whose rapid economic growth is adding millions to the middle class every year. But for now it is a difficult and diminutive market.

Despite its vast population, India has only 52 million active Internet users and only 40 percent of them have shopped online. What's more, fewer than 18 million people use credit cards, and most of them shop offline.

"The sophistication of the Internet user is the largest challenge. Now, there are between 15 to 20 million sophisticated users in India," said Subrata Mitra, a partner at Accel.

To get around their clients' credit card-aversion, the Bansals offer cash-on-delivery for their products, much as a pizza company does for dinner at your door, and this accounts for 50 percent of Flipkart's sales.

But the market outlook is bright.

For one thing, while printed book sales are slipping in most western countries, India's $2 billion book market is growing at around 15 percent a year thanks to rising literacy rates, the swelling ranks of middle class readers, and a thriving domestic literary scene.

"I don't see offline bookstores closing down anytime soon like they are in the U.S., where the physical book market is shrinking," Sachin Bansal told Reuters, but he said the strong demand for books would help online sellers as well as traditional high street stores.

Then there is the Indian e-commerce market, which is expected to grow by 47 percent to more than 460 billion rupees ($10 billion) this year, according to the Internet and Mobile Association of India.

Online travel is for now the dominant sector. Just last year, Indian online travel firm MakeMyTrip Ltd raised $70 million in a Nasdaq initial public offering.

"By 2015, we're expecting India to be one of the largest Internet-based economies. All these companies are at a stage where they can explode, depending on broadband connectivity," said Mritunjay Kapur, India head at Protiviti Consulting.

Rivals in the Indian e-commerce market include Letsbuy.com, which sells electronics, and InfiBeam.com, which sells electronics and books.

Anand Dikshit, executive director at PricewaterhouseCoopers in India, is more cautious about an industry now in a "trial-and-error" phase.

"I am not gung-ho on this in India right now. Let's see where these companies are after a couple of years because the sustainability is more important. There are no sustainable models as of now," Dikshit said.

The Bansals, however, are optimistic. They expect higher margins from non-book products, which now account for 60 percent of revenue, and are even looking forward to the competition from Amazon.

"Amazon entering the country will be a good thing for e-commerce, which is very small in India in relation to its potential," said Sachin. "The largest challenge we face now is to make e-commerce more viable for people to come online and shop."